Is privatization the solution for Saudi Arabia's economic woes?

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Article Summary
The current economic crisis raises questions about the viability of the privatization process in Saudi Arabia.

Saudi Minister of Economy and Planning Adel Fakeih recently said, “The ministry examined 146 fields and services and that 26 fields will be chiefly privatized and thoroughly addressed this year.” The minister pointed out that “the privatization program will include airports, municipalities, hospitals and education.”

The Civil Aviation Authority announced that the privatization of Saudi Arabia airports has kicked off. Its chairman, Sulaiman al-Hamdan, said this week, “Privatization of King Khalid Airport in Riyadh will start in the first quarter of this year, while the airports of Jeddah and Dammam will be privatized in 2017. Also, the air navigation sector will be privatized in the second quarter of this year, while the IT sector will be privatized in the third quarter. All of the regional and internal airports will be privatized in sets between 2018 and 2020.”

These announcements are only preliminary signs aimed at privatizing a number of government agencies and projects. What was announced during the first five days suggests that 2016 will be the privatization year for Saudi Arabia par excellence.

If an economy student is to enumerate the advantages of privatization, the list may be very lengthy, but the question arises as to whether all of these advantages and pluses are true. Do these advantages really occur? Some observations are to be taken into account.

First of all, in the absence of oversight and accountability, privatization leads investors in these projects to lose money. This eliminates the advantage whereby privatization allows a broad public base to co-own privatized projects and redistributes wealth to low- and middle-income classes. There are cases where manipulation and corruption plagued joint-stock companies on the Saudi stock market amid the lack of oversight and accountability, which led many citizens to lose money while only a handful of senior owners and directors made gains.

Second, privatization is often justified by the fact that the private sector is more efficient and productive than the public sector. This cannot be absolutely true. When good management is available in the public sector, productivity increases and performance improves.

It should be noted that the municipality of Dubai, which is part of the public sector, wins prizes every year for strong performance, outshining many of its competitors in the private sector. This is not to mention that some private sectors in Saudi Arabia are neither efficient nor productive.

Third, one of the biggest loopholes in privatization is that major bureaucrats shift from managing positions within the state into the private sector or make sure to employ their cronies, given that they are the senior owners of facilities after their privatization, having accumulated riches in their hands from their work in the public sector. This will cause bureaucracy and cronyism to move to the private sector without any enhancement in management or productivity.

Fourth, it is inaccurate to claim that privatization would aid the government’s budget given the revenues from major purchases of projects, relieving it from spending. In fact, some projects are assessed for less than their actual value in some developing countries, which makes the government lose an important source of income.

Should one of these projects falter after being privatized, the government would have to step in to aid them, tapping into its own budget due to social or security reasons. Perhaps our economic cities are the best example of these cases, as the government had been forced to intervene and aid some projects, placing their management in the hands of the Saudi Aramco, after the private sector had failed to fulfill its role.

Fifth, privatization normally leads to an increase in prices on the market, which necessitates dynamic management on the part of the government to take measures either by intervening or compensation, so as to protect small and medium businesses from the damage of privatization. The privatization process also requires an appropriate legislative, regulatory and judicial environment.

In conclusion, privatization is a good concept in theory and had been a success in the 1980s when the government of Margaret Thatcher sold a large number of public facilities to the private sector in Britain.

However, the financial crisis caused by the private sector in mid-2008 raised questions as to the ability of this sector to run the economy and as to the viability of this economic process. Thus, the focus has been shifted to the principle of partnership between both private and public sector, which serves as a compromise between the two and could be the best solution for Saudi Arabia today.

Found in: saudi government, privatization, private sector, foreign investors, financial crisis, economic crisis, bureaucracy
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